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On each side, an insurance plan

Jim Davis and Charlie Crist give voters a choice Nov. 7 of strategies the next governor might pursue to control spiraling costs.

By JONI JAMES and ALEX LEARY
Published October 10, 2006

Four weeks before Election Day, Democrat Jim Davis proposed a radical overhaul of Florida’s property insurance market, saying that as governor he would seek to have the state assume the liability for up to $20-billion annually in losses from hurricanes.

His hope: By the state assuming so much of the risk from hurricanes, and gambling that it won’t be slammed by too many storms, premium costs would be reduced dramatically for consumers.

“I am convinced that this is the single most powerful thing we can do to lower insurance prices next year,” Davis said Tuesday as he unveiled his plan before supporters in Boca Raton.

The congressman’s proposal comes weeks after Attorney General Charlie Crist, his Republican opponent, offered his own, less dramatic version of insurance reform. It also includes increasing the state’s financial exposure from hurricane damage but would largely leave the current insurance structure in place.

Davis said Tuesday that under the best-case scenario his plan might cut insurance rates 40 percent over requested 2007 rates for a Palm Beach County owner of a $150,000 property. But his projection had many variables and was based on broad averages, not a specific case study, and the homeowner’s policy costs would still rise over 2006.

Davis said his plan would largely eliminate the need for windstorm policies in Citizens Property Insurance Corp., the state-insurer of last resort that currently covers 1.2-million homes mostly along Florida’s coastline.

But his plan isn’t without significant risk. A single dramatic hurricane season could mean Florida’s debt, currently at about $22.5-billion, could nearly double overnight. His supporters said that’s acceptable given skyrocketing premiums that are forcing property owners to go bare or leave the state.

“The argument that we are taking on too much risk is pretty specious given that Citizens has us insuring 1.2-million homes but they are only high-risk homes,” said Rep. Dan Gelber, D-Miami Beach, who wrote a similar proposal during the 2006 legislative session that would have covered the first $100,000 in windstorm damages on any

Florida home. “Our plan would collect premiums not only from the lemons but the cherries.”

Crist’s campaign declined to critique Davis’ ideas Tuesday. “We’re glad Jim Davis is finally contributing to the debate on making property insurance more affordable for Floridians who are struggling to make ends meet. Charlie

Crist has said that this issue should not be political,’’ said spokesman Erin Issac.

Insurance industry reaction to Davis’ proposal was muted, with insiders saying they had heard few details and could not yet comprehend the scope of the proposal.

“To comment responsibly, you’d have to look at it for days,” said Sam Miller of the Florida Insurance Council, an industry group.

Key to both men’s strategy is changing how insurers use and access reinsurance, or insurance policies insurers buy to protect themselves against catastrophic losses. The global reinsurance market has dramatically increased what it charges in the wake of the 2004 and 2005 hurricane seasons, and is considered the primary reason policyholders’ costs are growing.

For more than a decade as part of its strategy to keep insurance premiums low, Florida’s government has sold reinsurance below market value for losses between $5.2-billion and $15-billion.

In this structure, when the so-called Florida Hurricane Catastrophe Fund runs a deficit, as it did after the 2005 hurricane season, all insurance policyholders are assessed to make up the debt.

Crist has called for expanding the state’s reinsurance system by covering losses starting at $3.2-billion. That would lower the pressure on premiums, which can be raised dollar-for-dollar to cover reinsurance costs in the private market.

But it would also potentially increase the odds Florida policyholders would be assessed after a storm to make up deficits.

Crist has also pledged to demand that insurers offer property coverage in the state if they already offer automobile insurance. And he has said he’ll seek to undo a 1998 law change that has allowed insurers to create Florida-only subsidiaries. He has also joined a long list of Florida leaders, including Davis, who want the federal government to create a national catastrophe fund.

Davis’ plan is more dramatic. He would eliminate the state’s reinsurance program and replace it with a direct underwriting program. The governor and Cabinet would decide each year what percentage of damages from windstorms to cover on any home statewide, such as 70 percent to 90 percent, with a total cap on damages of $20-billion.

Private insurance companies would set rates based on the state’s coverage and their costs to provide the balance of coverage.

To consumers, the process would be mostly invisible, but a pro-rated portion of the premium would flow into a state “Hurricane Premium Protection Fund” to pay the state’s portion of windstorm claims.

In years without hurricanes, the fund’s assets would grow, unlike premium payments to private insurers, which may be spent for profit or other expenses. The more years without significant storm activity, the better for insurance costs.

But in times of deficits, the fund would sell bonds to pay damages. It would assess Florida insurance policyholders similar to how the so-called catastrophe fund and Citizens now do. From the 2004 and 2005 hurricane seasons, Florida policyholders are being assessed more than $3.5-billion to cover deficits in the CAT Fund and Citizens.

Those deficits mean Davis’ plan would likely start with close to zero in assets, greatly increasing the odds of future assessments if meteorologists’ predictions of increased hurricane activity are accurate.

That point was a key criticism earlier this year from insurance regulators when Davis’ opponent in the primary, state Sen. Rod Smith, D-Alachua, floated a similar plan to have the state cover the first $100,000 in damages per home.

A government analysis contended the Democrats’ plan would have led to a deficit of at least a $16.4-billion after the 2004 and 2005 hurricane seasons.

But supporters note that only once in Florida history, at $25-billion in 2004, have insured damages from hurricanes topped $20-billion. And they say it would allow the state to spread the risk across all Florida properties, not just those stuck in Citizens.